Archive for May, 2009

In my opinion, one of the biggest contributors to the crisis we know so well was compensation schemes that gave individuals at financial institutions – from junior traders all the way up to CEOs – the incentive to take massive bets. Put people in a situation where the individually rational thing to do is take lots of risk, and they will take lots of risk – especially if they are generally ambitious, money-loving, and predisposed to think that if the market is giving it to them, they must deserve it.

Last October, on Halloween to be precise, Carl Icahn posted an article on www.icahnreport.com that leads with “Executive pay is out of control in this country.” Well he certainly was neither the first nor the last person to make that observation. He takes direct aim at the people he believes are to blame for this problem: Compensation Consultants. His caustic observations along these lines made me realize that it might be harder to be a compensation consultant these days, than it is to be a lawyer. And it reminded me of a joke: Continue reading “How Do You Get a Lawyer to Smile?” »

I was fascinated to see the Eliot Spitzer (yes THAT Eliot Spitzer) had an article published in Slate.com but was even more interested to see that the subject was the apparent change of heart of one of the most prominently conservative federal judges, Richard Posner. Spitzer notes that “[Posner] is both the creator and the defender of the free-market theory that has guided deregulation for the past 30 years.” Further Spitzer notes that in a dissenting opinion, “Posner wrote that there is growing indications that CEO pay ‘is excessive because of the feeble incentives of the board of directors to police compensation…’”. Wow that is pretty left wing for Posner. Continue reading “Management, Boards and Comp Consultants: A Change of Heart?” »

The Berkshire Hathaway Annual Meeting, held on May 2, 2009, is reported to have met expectations on all fronts: entertaining, folksy, touching and of course informative. The meeting this year was attended by more than 35,00 people which might attest to the interest that people have in Buffet’s investing style, in Berkshire Hathaway itself, or perhaps it might speak to the reach of eBay, where Berkshire Hathaway was selling admission passes to the public for $5 a piece. Continue reading “Woodstock for Capitalists Revisited” »

Despite the vast outpouring of commentary and outrage over the financial crisis, one of its most fundamental causes has received surprisingly little attention. I refer to the perverse incentives built into the compensation plans of many financial firms, incentives that encourage excessive risk-taking with OPM — Other People’s Money.

Citigroup Inc. Chief Executive Officer Vikrim Pandit weathered almost six hours of grilling from shareholders at the bank’s annual meeting on April 21. He had a lot of explaining to do: The company lost $27.7 billion in 2008 and stayed afloat only with help from a $45 billion government bailout.

The public outrage over bonuses paid to AIG executives, and resulting government proposals to cap pay at companies receiving federal bailouts, illustrate rising concerns about executive compensation. Indeed, some analysts contend that ineffective compensation structures encouraged Wall Street executives to take on excess risk in the hopes of winning huge payouts, which in turn contributed to the continuing financial crisis and recession.